Cash flow – the movement of money in and out of your business – can make the difference between a thriving, growth-oriented enterprise and one that struggles to move forward.
Don’t be flattered by profit alone. Even if your business is profitable, a strained cash flow is considered a major risk.
It signals that your business is vulnerable to things going wrong, such as a payment dispute, which means you can’t pay your bills. It also shows that you may not be creating enough cash to reinvest in the business.
While managing cash flow may seem tricky, there are time-tested strategies you can implement to take control of your finances and ensure your business remains financially resilient.
Read on, and we’ll explain them in detail.
Understanding the Vital Role of Cash Flow
Cash flow refers to the net amount of cash and cash-equivalents moving in and out of your business during a given period.
Positive cash flow indicates more money is coming in than going out, while negative cash flow means more is being spent than received.
To calculate your cash flow, start by tracking all incoming and outgoing transactions, including sales revenue, accounts receivable, operating expenses, loan repayments, and any other cash-related activities.
Think of your own personal life. You have money coming in from a salary or other cash in-flows and money going out on bills, mortgages, your car, insurance, and so on.
If you have £4,000 coming in and £3,000 going out, your net positive cash flow is £1,000 – very healthy for most people.
But as a business, if your cash flow is £1,000 and you’re struck with a double whammy of a late invoice combined with having to replace expensive machinery, suddenly, you’re digging into cash reserves.
Here’s a simple cash flow calculation example for a business:
- Sales Revenue: £50,000 Accounts Receivable: £10,000 Operating Expenses: £30,000 Loan Repayments: £5,000
- Net Cash Flow = Sales Revenue + Accounts Receivable – Operating Expenses – Loan Repayments = £50,000 + £10,000 – £30,000 – £5,000 = £25,000
In this scenario, the small business has a positive net cash flow of £25,000, indicating more cash is coming in than going out.
Why Monitoring Cash Flow is Important
Monitoring and optimising your cash flow is crucial for several reasons:
Operational Stability
Positive cash flow ensures you can cover your day-to-day expenses, such as paying staff salaries, rent, supplier invoices, and other critical operational costs without disruption.
Fueling Growth
Healthy cash reserves empower you to invest in expansion opportunities, such as hiring new talent, upgrading equipment, or entering new markets.
Financial Resilience
Strong cash flow provides a buffer against unexpected challenges, like economic downturns, late-paying customers, or other unforeseen circumstances.
The Perils of Poor Cash Flow
Now, what about the danger of not looking after your cash flow?
Let’s consider a small retail shop, XYZ Boutique, that specialises in selling high-end clothing and accessories. In the most recent quarter, XYZ Boutique generated £300,000 in revenue but had the following operating expenses:
| Expense | Amount |
| Rent | £50,000 |
| Utilities | £20,000 |
| Inventory Purchases | £100,000 |
| Staff Salaries | £80,000 |
| Other Expenses | £25,000 |
| Total Operating Expenses | £275,000 |
Even though XYZ Boutique is a profitable business, generating £25,000 in quarterly profit, its high operating expenses of £275,000 are straining the company’s cash flow.
Here’s a breakdown of XYZ Boutique’s cash flow situation:
| Metric | Amount |
| Revenue | £300,000 |
| Operating Expenses | £275,000 |
| Profit | £25,000 |
| Accounts Receivable | £0 (all sales are cash/card) |
| Available Cash | £25,000 |
As the table shows, with £25,000 in available cash after covering its operating expenses, XYZ Boutique has very little financial flexibility. This could make it challenging to:
- Cover unexpected costs or emergencies
- Invest in inventory, marketing, or other growth initiatives
- Weather any temporary dips in sales or other cash flow disruptions
This example highlights how high operating expenses, even for a profitable business, can severely limit a small company’s cash flow and financial resilience.
£25,000 profit might seem excellent, but it doesn’t actually leave huge financial leeway in proportion to the business’s expenses.
Proven Strategies for Improving Cash Flow
As shown, while profitability is essential, many businesses underestimate the significance of proactive cash flow management.
Even a profitable company can struggle if payments are delayed, operating costs are high, or invoicing processes are inefficient.
Here are some proven strategies for improving your cash flows now and in the future:
1. Accelerate Invoicing and Collections
One of the quickest ways to improve cash flow is to get paid faster. Review your invoicing and collections procedures to identify areas for improvement:
- Invoice Promptly: Send invoices to clients within 24 to 48 hours of completing a job or delivering a product. This ensures you get paid as soon as possible.
- Offer Flexible Payment Options: To make it easier for clients to pay, offer a range of payment methods, such as online payments, direct bank transfers, and mobile wallets.
- Communicate Payment Terms Clearly: Specify payment deadlines and late payment policies on all invoices and proactively follow up on overdue payments.
- Incentivise Timely Payments: Offer early payment discounts or impose late payment penalties to encourage clients to pay on time.
- Automate the Process: Utilise cloud-based accounting software to streamline invoicing and send automated payment reminders.
2. Negotiate Better Terms with Suppliers
Just as you want to get paid faster, you should also aim to pay your own suppliers and vendors on terms that benefit your cash flow.
Negotiate for longer payment periods, such as 30, 60, or even 90 days, to give you more time to collect from your customers before having to pay your bills.
You can also try to negotiate discounts for early payments or bulk purchases. This will help you save money and improve your cash position in the long run.
3. Optimise Inventory Management
Holding too much inventory can drain your cash flow. Review your inventory levels and identify any slow-moving or obsolete items that you can liquidate.
Consider implementing a just-in-time inventory system, where you only order what you need to fulfil customer orders rather than stocking up.
Additionally, look for ways to reduce the time it takes to turn over your inventory. This could involve offering discounts on bundled products, selling in smaller quantities, or finding new sales channels to move inventory more quickly.
4. Explore Alternative Financing Options
If your business is experiencing a temporary cash flow crunch, consider exploring alternative financing options beyond traditional bank loans. These can include:
- Invoice Factoring: Selling your outstanding invoices to a third-party company in exchange for immediate cash
- Business Lines of Credit: Providing access to funds as needed, similar to a credit card
- Crowdfunding: Raising capital from a large number of investors through online platforms
These options can help bridge the gap during periods of low cash flow without relying on personal savings or maxing out credit cards. But don’t get in the habit of relying on them to keep your operations afloat.
5. Cut Unnecessary Expenses
Carefully review your business expenses and identify any areas where you can cut costs without compromising your operations.
This could include renegotiating service contracts, reducing office supplies, or optimising your marketing budget. Even small savings can impact your cash flow.
6. Leverage Technology to Streamline Cash Flow Management
Embracing cloud-based accounting and invoicing software can transform your cash flow management.
Tools such as Xero, Sage, QuickBooks, etc, automate many time-consuming tasks, such as invoicing, expense tracking, and financial reporting.
This saves you time and helps you identify cash flow trends, forecast future needs, and make more informed financial decisions.
Mastering Cash Flow for Long-Term Success
As we’ve demonstrated, effective cash flow management is essential for long-term success. It’s an ongoing process, and finding the best combination of tactics for your company may take time.
Don’t be afraid to experiment and adapt your approach as your business grows and evolves.
With dedication and a proactive mindset, you build strategies to maintain a healthy cash flow and remain financially resilient.
If you need further assistance in optimising your cash flow management, the team at Double Point is here to help.
Our experienced chartered accountants can provide expert advice and support to help your business thrive.
Contact us today to schedule a consultation and take the first step towards a more secure financial future for your company.
